A collar position is created by holding an underlying stock, buying an out of the money put option, and selling an out of the money call option. Collars may be used when investors want to hedge a long position in the underlying asset from short-term downside risk.

What is a collar strategy?

Definition: The Collar Options strategy involves holding of shares of an underlying security while simultaneously buying protective Puts and writing Call options for the same underlying. It is technically identical to the Covered Call Strategy with the cushion of a Protective Put.

How does a two way collar work?

A costless collar is the combination of two options. ... In addition, to make the option costless, the options will be structured so that the premium paid for the put option will be offset by the premium received from selling the call option.